Import substitution industrialization, or ISI, is an economic development program in which reliance on imports to a specific nation is subordinated to the development of local industries within that nation. From an international political economic perspective, we are currently in the period of post-WC (or confusion) (Naim, 1999; Rodrik, 2006a). However, these programs have rarely resulted in strong home-grown industries and the evidence would seem to indicate these programs have done more to retard economic growth and poverty reduction than to improve the situation. Industrialization, however, has produced different results among the four economies. The era of openness, however, is drawing to a close. Thus, the export market would automatically be taken care of. But explosive trade growth has ended, and the industrialised world is turning inward. Entrepreneurs in industries like textiles did indeed continue to demand that indulgent states provide them with protection long after they should have become mature and internationally competitive. Are fears over the Citizenship (Amendment) Act misplaced? Then the so-called “second-generation” reforms were introduced, which were heavily institutional in nature. The assumption is contradicted if these conditions do not hold. The administration also lifted restrictions on foreign investment in many sectors – in particular, allowing foreigners to own 100% of manufacturing businesses outside of major cities. It was most popular in Latin America in the 20th century, and India too adopted it prior to the liberalisation of its economy in 1991. By using Investopedia, you accept our. For a short while in the early 1950s, South Korea and Taiwan did follow the import substitution strategy. Countries with a small industrial base, or none at all, could export manufactured goods by finding niches in production chains, following a shortcut to industrialisation. In this period, the growth of China and Vietnam took place, which—although a pleasant surprise—should not have happened according to the WC. One debate on growth and development is the alternative strategies of export-led versus import substitution industrialization (Kruger, 1985, 1990bKruger, 1985Kruger, 1990b; Krugman, 1984). While the fact of such measures is undisputed, the counterfactual claim of what would have happened in their absence is largely speculative. The precatching-up stage is characterized by the import-substitution policy phase during the 1960 and 1970s. Per capita GDP is a metric that breaks down a country's GDP per person and is calculated by dividing the GDP of a country by its population. Theorists like Anne Krueger (1974) applied this logic to strategies of import-substituting industrialization, arguing that the desire to gain protection from foreign competition led entrepreneurs to focus on the unproductive quest for state favors rather than on competitiveness. Kui-Wai Li, in Redefining Capitalism in Global Economic Development, 2017. Even if some merit might exist for supporting infant industries, as many countries have done historically, implementing this support through protectionist measures would complicate trade governance by blurring the boundary between mercantilism and efforts at industrial promotion. ■, This article appeared in the Finance & economics section of the print edition under the headline "Turning inward", Sign up to our free daily newsletter, The Economist today, Published since September 1843 to take part in “a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress.”. Brazil had a highly regulatory system for controlling foreign firms and the import of goods and services. Surveys of African industrial firms by the International Growth Centre, a research network at the London School of Economics, find that many started out as import-export businesses before venturing into domestic manufacturing. That is, FDI will be stimulated by the government’s application of tariff and nontariff barriers to protect domestic industry or any particular sector of the national economy. Rodrik (2006a) summarizes the “Augmented WC” policies, which were a paradigmatic example of “free market” policies: part of a shift toward a neoliberal economic policy philosophy that was a characteristic of the OECD or the more developed world. Imports were growing faster than exports, creating balance of payments problems and state expenditures were increasing more rapidly than revenues, creating fiscal problems. This approach installed not only high import tariffs, but also nontariff barriers on the importation of foreign goods, and provided subsidies to aid Mexican industries. However, we still lack a clear understanding of the conceptual character of new industrial policies. All rights reserved. If the world’s biggest economies focus on their own strategic interests alone, they will deprive others of access to these precious resources—and the golden age of emerging-market growth will become an ever more faded memory. Inward-looking import substitution strategies generally lead to overall inefficiencies in an economy and higher transaction costs which lead to slower growth than does the use of more outward-looking strategies (Sachs and Yang, 1999). Collections. You have reached your limit for free articles this month. Understanding Import Substitution Industrialization (ISI), The History of Import Substitution Industrialization (ISI) Theory, The Theory of Import Substitution Industrialization (ISI), Real World Example of Import Substitution Industrialization (ISI), the founding document of Latin American structuralism. The Hindu has always stood for journalism that is in the public interest. This “hyperglobalisation”, as Martin Kessler and Arvind Subramanian of the Peterson Institute for International Economics dubbed it, facilitated rapid, broad-based economic expansion. Latin American countries in their industrialization process adopted import substitution, while East Asian economies followed an export-led strategy in most cases. Oil rents allowed most countries in the Middle East and North Africa to avoid instituting painful structural reforms. This policy philosophy represented a reaction to the failures of the state in attempting to correct those of the market. The Mexican model of development, based on ISI, continually ran into trouble in the 1970s and 1980s. When these were exacerbated by stagnation and foreign debt crises in the 1970s, many Latin American nations sought loans from the IMF and the World Bank. In India, with its poorer and less integrated domestic market, the strategy is riskier. Yet in the years following World War II, these programs were very popular in many developing countries, many newly independent and eager to shed off ties and ideas associated with the colonial system. Hey, IB Economics Students and Teachers - FINALLY IT’S ALL IN ONE PLACE! In fact, the country had a balance-of-payments crisis, that is, had to devalue its currency, in 1954, 1976, and 1982. Countries implementing this theory attempt to shore up production channels for each stage of a product's development. Protection, in the form of high tariffs or the restriction of imports through quotas, was applied indiscriminately, often to inherently high-cost industries that had no hope of…, …’70s pursued a strategy of import substitution designed to transform Argentina into a country self-sufficient in industry as well as agriculture. What is ‘Import substitution’ in Economics June 28, 2017 02:05 IST Updated: June 28, 2017 22:47 IST June 28, 2017 02:05 IST Updated: June 28, 2017 22:47 IST Share Article; PRINT A A A; For example, in the case of the United States, domestic pig iron-making capacity was aided by protectionist measures in the nineteenth century with greater effect prior to the Civil War than following—however, in neither period is it likely that the industry would have disappeared without the tariff (Davis and Irwin, 2009; Irwin, 2000).